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The Mariana Trench of Personal Finance

Most young adults face enormous financial obstacles getting started in life. This often results in credit card debt, student loan debt, automobile debt, and a mortgage. Taken together I consider this chasm of debt the Mariana Trench of personal finance. If you jump in you may never get out.

The problem is that any young person without significant outside support has to navigate the issues of transportation, housing, and living expenses early in life. In the midst of these challenges the bait drops in. The problem isn't the bait itself. Nothing wrong with a fish eating a worm or a person having a nice car. The problem is the hook inside.

It is fairly easy to understand the total amount of interest we pay over the life of a loan. We lose the present value of that money. What is a little more difficult to understand and what is sometimes perhaps not considered is that we also lose the future value of the money we spend on interest. When we spend money on interest, we lose the opportunity to invest the money and earn compound returns. This could be hundreds of thousands of dollars in lost assets later in life.

Making purchases with debt also tends to encourage us to spend more than we otherwise would and to invest less than we otherwise could at precisely the wrong time in life. To become financially secure and financially independent most of us need to begin investing while we are young rather than pay interest on debt.

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Friday, 19 October 2018

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